Tax Implications That Come With Selling a House
Owning a home is an exciting milestone to hit. It’s even more exciting when you go to sell your home and make a nice little profit. Through all of the moving parts that come with selling a home, let’s be honest, the last thing sellers are thinking about is what their taxes will look like. As if selling your place isn’t tedious and complicated enough, there are several tax rules that are attached to it, as well. Don’t be intimidated, we’re here to break down some of the basic tax implications for you below!
A Profit does not equal taxable income.
Unfortunately, making a profit on your sold home does not mean that you can claim all of that money as taxable. You first have to meet certain criteria, and only then do you qualify for an exclusion. The criteria include:
Your capital gain is $250,000 or less. If you are married and file taxes jointly, the amount is up to $500,000
You owned the home as your primary residence for at least two of the last five years before the date of the sale. During those two years, you didn’t claim an exclusion on the sale of another property
The home didn’t become yours by way of a like-kind exchange in the last five years
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If you didn’t meet the qualifications above, don't fret. You may qualify for a reduced exclusion, and a portion of the profit may still qualify as tax-free. Let’s say you only lived in the home for one year prior to selling, a reduced exclusion is available if you had one or more of the following:
Change of employment
Change of health
Another unforeseen circumstances (example: divorce)
You don’t have to exclude the gain.
A good piece of advice is if you plan to move again before you hit that two year threshold, consider claiming instead of excluding the gain on the sale of your current home. The reason being is that you are only able to exclude on the sale of your primary residence once every two years. Depending on your specific sale, it may be more beneficial to claim the current gain as income. You can then use the exclusion on the future sale of your main home.
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Taking a hit on your sold home isn’t a deduction.
Sadly, if you lost money on your sold house, things are not looking up for you when it comes to your taxes. If you sell your house and come in under what you paid, you aren’t able to deduct, and have to chalk it up as a personal loss.
Did you get a First-Time Homebuyer credit? There is a possibility that you will have to fork some or all of the credit back over to the IRS. If you took advantage of the First-Time Homebuyer Credit in 2008 or you purchased in either 2009 or 2010 and sold it or stopped living in your home before the 36 months were up, you may be on the hook for paying some or all back to the IRS.
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Here is a breakdown of what to expect if you have to pay the credit back. Of the smaller of these two amounts:
Your gain on the sale of the home
The amount of your credit reduced by any repayments – if the credit was from 2008, or
The amount of credit you received – if the credit was from 2009
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Not all hope is lost though. There are some exceptions that release you from the obligation of paying the credit back. Talk to your CPA to see if your circumstances put you in the exception category.
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Investment properties are not the same thing
Investment properties have always been popular with real estate. Many real estate investors rent out their properties as an easy way to make profit, with not having to do a whole lot of anything. The catch is that when you go to sell an investment property, meaning you never lived there, you don’t get the same tax breaks you get when selling your primary house. Let’s break this down a little further. If you are using your investment home as a rental, you can’t exclude any gain from your taxable income starting when it was rented.
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What do you do if you are a multi-property owner and not all properties are rentals though? Perhaps you travel somewhere a little warmer for the winter months, and thus reside in two or more homes a year. Even if this is the case, you are only eligible for one sold house to be excluded. You can only exclude the gain on the sale of the main house you lived in for the majority of the year. So if you are split down the middle, it is usually the place you use as a billing address and have mail sent to.
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Special tax circumstances for homeowners
If you’re a homeowner, you either purchased your home from a seller, you built your home, or you inherited your home. Depending on how you acquired your home may change your tax scenario. Here’s a breakdown to help unveil the original cost of your home:
If you purchased your home from a seller. The all-in price you paid for the house is your purchase price. This includes everything from closing costs to the down payment.
If you built your home, the amount you paid, including closing costs when you bought the land, is the cost of your home. It also includes expenses such as contractor and/or architect fees, permit charges, labor and materials, etc. Please note that if you built or purchased your home, the IRS doesn’t allow sales tax to be a part of your cost basis if you deduct those taxes as itemized deductions.
If you inherited a home, the cost is based on the fair market value of your home on the date of death of the previous owners. If you inherited a home but you don’t sell the house within the first year, we recommend hiring a professional appraiser to assess the fair market value asking price of the home.
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The information above is really just the tip of the iceberg. As you have gathered, though the tax implications of selling a house are fairly black-and-white, meaning you will or will not owe on taxes after closing, tax rules can still get complicated quickly. For the sake of your bank account and sanity, contact a professional when selling a home to help organize your taxes for you. Speaking with your CPA to avoid any surprises come tax season is always a smart idea. If you are in need of professional tax services to help you during or after selling your home in areas of Wisconsin or the Upper Peninsula of Michigan, or simply want more information, please call us (906) 774-4051 or email at solutions@f-ccpa.com. We would love to help!